The Washington Post Gets Out Extra Whitewash for Piece on the IMF and Greece

The Washington Post had a front page fluff piece on the IMF of the sort that would be expected in a paid advertisement. The 5th paragraph tells readers:

"Over the decades since its creation after World War II, the IMF has taken responsibility for ensuring the health of the global economy. The agency has repeatedly rescued teetering governments and restored confidence to panicked markets by coupling its unrivaled expertise with money provided by member countries, most prominently the United States."

The evidence does not fit this picture well. The IMF had enormous sway in determining economic policy in developing countries in the decades of the 80s and the 90s, especially in Latin America where many countries were following the Washington Consensus neo-liberal model. This led to two decades of dismal economic growth and weak progress on social indicators like health care and education measures.

The "rescue" of East Asia following its financial crisis was especially onerous. As a result of the harsh conditions imposed on the countries of the region, developing countries began accumulating massive amounts of reserves in order to ensure that they would never be forced to deal with the IMF.

This meant running huge trade surpluses, especially wiith the United States. That created the fundamental imbalance of the last decade that was associated with the housing bubble. Instead of rich countries lending money to poor countries, poor countries were lending massive amounts of money to the United States in order to keep up the value of the dollar and sustain their trade surpluses. Lacking productive investment outlets, this money was used to fuel the housing bubble.

Rather than being seen as an agency that looks after the health of the world economy, the IMF is better understood as the agent of a creditors' cartel, getting as much money as possible back for private creditors. This is the only plausible way to understand its dealings with Argentina during its crisis in 1998-2002.

The IMF imposed ever more onerous conditions on the country, pushing it into a depression. When the government finally broke with the IMF because it could no longer meet these conditions, the IMF did everything it could to sabotage its recovery. This included issuing tremendously pessimistic growth projections that could discourage private investment. Nonetheless, Argentina's economy grew rapidly, as it quickly regained the ground lost in the recession.

The article also concealed the IMF's repeated errors in dealing with the current crisis in Greece and the Eurozone telling readers at one point:

"But the prognosis for the bailout was getting grimmer. At the IMF, assumptions about Greece's prospects were tumbling. Spending cuts by the Athens government were weakening economic activity, pushing the country into a deeper recession than expected. The wider European economy was slowing, denying Greece the lift anticipated from trading with its neighbors." [emphasis added]

The poor performance of Greece was entirely expected by many analysts. It was a predictable result of large cutbacks in government spending coupled by similar moves to austerity in its major trading partners.

Greece's fundamental problem is that its economy has become uncompetitive with northern Europe leading to a huge current account deficit. This can only be corrected by having prices in Greece fall relative to prices in Northern European countries.

This can be accomplished either by having prices in Greece fall, or prices in Northern Europe rise more rapidly. The former is very difficult to accomplish, while the latter could be done relatively easily if the European Central Bank would just allow a somewhat rate of inflation (e.g. 3-4 percent for the Eurozone as a whole). The IMF has refused to ever state this obvious truth, even though its chief economist, Olivier Blanchard has made exactly this sort of argument in an IMF paper. In short, the IMF is pursuing a policy in Greece that almost certainly cannot succeed because it is continuing to defer to the powerful economic and political interests in Europe, rather than applying sound economic reasoning.

It is also worth mentioning that IMF economists can retire in their early 50s with 6-figure pensions. This likely undermines their authority when insisting that countries cut back pensions that average less than 1000 dollars a month.